Consumers in South Africa are in their lowest point, financially, in years – but the worst might be over.
According to Efficient Wealth, South African consumers have been battered by low wage growth, high interest rates, and increasing debt, resulting in a persistently weak economy.
Salaries in South Africa have not kept up with inflation, which has resulted in a decline in buying power.
For instance, the Bankserv Africa Take-home Pay Index (BTPI) ended last year at R15,409 in nominal terms, 5.6% higher than the R14,596 recorded in December 2022.
However, considering the average consumer inflation rate of 6.0% in 2023, real-take-home pay in December 2023 was R13,723 in real terms, representing a 4.7% drop from the previous year.
“The danger of plummeting salaries, however, is not just that households stop spending sufficiently to grow the economy but that consumers will need to borrow money to make ends meet,” Efficient Wealth said.
“In these tough times, consumers often turn to unsecured loans, which are not backed by any assets, which means banks charge higher interest rates to offset the risk. This usually does not end well for the borrower.”
“The last time there was a boom in unsecured loans (between 2012 and 2014), many households ended up poorer than before because they could not keep up with the interest rates that they were being charged.”
With lower incomes and higher interest rates, households have been unable to purchase the goods and services they previously could afford, putting strain on the services sector and the broader economy as over 60% of GDP is attributed to private final consumption.
Economist Roelof Botha also highlighted this in the latest Altron FinTech Household Resilience Index (AFHRI), noting that restrictive monetary policy has placed severe pressure on South Africans, with the ratio between household disposable income and household debt costs being the worst-performing indicator.
Things are looking up
However, Efficient Wealth said that the outlook for 2024 is more positive, with inflation and food prices expected to ease.
Interest rate cuts are also expected this year, with a possible 100 bps worth of cuts seen over the year.
“Amidst cooling prices and the resilient nature of recovering enterprises, we are even expecting higher income growth this year. Overall, the purchasing power of households should improve, together with their standard of living, which declined during 2022 and 2023,” the group said.
“That being said, consumers will probably only really feel the difference in 2025.”
Moreover, despite the strain it might put on the fiscus, the creation of a basic income grant will reduce the gap between those who have jobs and those who don’t while reducing political tension as well.
President Cyril Ramaphosa and the ANC will also likely use this and other policies as electioneering tools to win votes, such as the National Health Insurance (NHI).
Even if the NHI is signed into law, it will likely be opposed in court, with this current version not seeing the light of day for many years.
In addition, although the President said that he intends to implement the previously announced pay increase for 1.3 million state employees, which would likely widen the budget deficit to 4.8% of GDP this year, far higher than official estimates, markets were expecting this and should not react too negatively.